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administrative adjustment, Color Arts used an improper method of
accounting that failed to consider the conditional element of its
vacation pay policy. As a result, Color Arts consistently and
systematically claimed vacation pay deductions before their
proper accrual.8 See sec. 461(h); H.F. Campbell Co. v.
Commissioner, 53 T.C. at 447. Under Color Arts’s improper method
of accounting, the deduction for vacation pay was accelerated; it
is clearly a “material item” within the contemplation of the
regulations since it “involves the proper time for * * * taking
of a deduction.” Sec. 1.446-1(e)(2)(ii)(a), Income Tax Regs.
The premature deduction of accrued vacation pay was not due to a
computational or posting error. The only “error” Color Arts
cites is its application of an improper method of accounting
which resulted in the deduction of vacation pay before its proper
accrual. Accordingly, we hold that Color Arts’s method of
accounting for its vacation pay has been changed and, as a
result, that section 481 is applicable.
We disagree with petitioner that if we impose a section
481(a) adjustment, Color Arts will lose “whatever proper
deduction that it should have taken in 1995 because that year is
now a barred tax year under the statute of limitations”. The
record demonstrates that Color Arts has employed the same
8As stated above, Color Arts employed this improper method
of accounting for vacation pay for at least 3 consecutive tax
years.
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